The Golf News Net

The past few weeks have been very trying ones for the golf business world.  Ryan Ballengee details what has happened so far, what is likely to happen ahead, and what the PGA Tour will have to do about it.

The past few weeks have been very trying ones for the golf business world.  First, Stanford Financial is raided by the FBI and the behest of the SEC under suspicion of fraud in the order of $8 billion.  Stanford still is sponsor of a PGA Tour and LPGA Tour event, as well as several golfers and the Eagles for St. Jude program.  Clearly, that is now is deep doubt.

Then, yesterday, Congress began taking Northern Trust to task for their sponsorship of last week’s PGA Tour event at Riviera.  The criticism was not only that Northern Trust was title sponsor of the event.  They were also read the riot act because of how much money the spent on hospitality for their employees and VIP clients.  Spending millions of dollars on lavish celebration at a golf tournament does not look good to Congress when the company spending the money has receiving a capital infusion from the federal TARP program.

Northern Trust claims that they don’t need the money and have remained profitable through the entire financial crisis.  That may be true, but it would be awfully tough then to explain then why 450 employees are being let go by the firm.

As a proactive reaction to this news, Wells Fargo announced that it would be drastically scaling back spending at the Wachovia Championship at Quail Hollow.  Wells Fargo purchased Wachovia on the cheap through the FDIC after the embattled banker’s capital position endangered its existence.  Wachovia got into trouble after making and purchasing mortgages with dangerous payback options and a lack of due diligence.

The bad news kept on coming when FBR Capital Markets announced that it will no longer sponsor the event in Scottsdale after 2010.  FBR became sponsor of the event in 2007 with a five year contract.  The contract had a bailout clause after three years.  With FBR’s stock at pennies, it would seem an obvious cost-cutting measure to take that bailout – or any other bailout that someone wants to give to them.

Several weeks ago, Chrysler took its name off of the Bob Hope event in California amid concerns that it would look bad visibly spending millions on a golf tournament while receiving a multi-billion dollar loan from the government.  And that’s not to say anything of Buick, which is a major golf sponsor.

That makes six PGA Tour sponsors that are on the hot seat for their involvement with golf.  Almost all have already or likely will stop sponsoring golf sooner than later.  This clearly creates a huge problem for the PGA Tour.

These are not the only six companies on the schedule that will receive or already have received this kind of scrutiny.

The Ginn Companies are basically bankrupt and pulled out of their sponsorship responsibilities with the PGA Tour, Champions Tour, and LPGA Tour.  They are being sued for breach of contract, but the Tours are likely not in first lien position when it comes to Ginn’s debts.

US Bank has received TARP money, but they bailed out of the Wisconsin event because they were not getting enough return on their investment.  Staging an event opposite the Open Championship usually will cause that.  Couple that with great expectations and a big price tag, and it’s easy to see why US Bank was unhappy.

Car companies are getting simply slaughtered right now by lack of global demand.  Aside from General Motors and Chrysler, the PGA Tour has to worry about Honda, BMW, and Mercedes-Benz.  The latter has already said that it may not return as title sponsor of the season-opening event after next year due to weak fields and the weak economy.

There are other financial companies that may or may not be in some trouble, like Zurich in New Orleans, Travelers in Connecticut (which recently extended its contract through 2014), Morgan Stanley at Jack’s tournament, the Legends real estate group in Reno, the Barclays, and Deutsche Bank in Boston. 

Deutsche Bank has gone on record as saying that they would not be sponsoring golf right now were it not for its contract.  When it expires, it is not hard to imagine that Deutsche Bank may walk away from the Tour.

All told, my count is seventeen PGA Tour sponsors that are in trouble, have walked away, or may be in financial trouble.

The Tour relies on corporate sponsorship and hospitality spending at its events to power the purses, philanthropic giving, and other costs of running a championship.  It has moved away from a model that is more locally based in order to appeal to transnational corporations and the upper class.  It made sense for the Tour to do this at a time when the economy was humming and sponsors were willing to shell out the money in what they deemed to be a win-win situation.

Now, that’s not the case.  Stock prices are extremely low for these companies that are traded – much closer to zero than their 52 week high.  Cash flows are hurting big time.  On their own, these corporations would be hard pressed to continue making an investment in golf.

Add in the fact that each of these companies has received or will likely receive bailout money from the federal government.  The government wants to see severe restrictions in how companies spend money if they have received bailout funds.  That includes spending millions of dollars in public at PGA Tour events.

What can the Tour do?  Its options are limited and not pretty.

As Greg Norman has suggested, it may be time for the PGA Tour to cut sponsorship fees across the board.  This will likely keep the interest of many more of the coveted transnationals that sponsor the Tour today.  A gesture of mercy now may keep them on board for the current fee and then some when the economy improves down the line.  Yes, that would trigger a decrease in purses unless the Tour uses its rainy day fund to prop up purses in the interim.  Not knowing how long the recession will last, I would think that the Tour should save its money.

Cutting purses is not exactly a bad thing.  While I do not agree with cutting purses to show empathy, the idea may well have some weight.  Even if the Tour doesn’t cut purses, it should continue to cut ticket prices across the board.  Ticket prices in almost every professional sport are frozen or decreasing right now.  The Tour should do the same and undercut the competition.  Make the Tour into a middle-class family-friendly event.

Also, it may be time to return to more locally based sponsors.  In some cases, PGA Tour events already have corporations backing them that are based in the same area as the host course.  The Tour should encourage more of that kind of sponsorship.  It is a model that the LPGA Tour has employed well for many years. 

The LPGA Tour has tried too quickly to take the PGA Tour’s transnational approach.  In the process, they have lost four events this season.  The LPGA Tour will also be competing with the PGA Tour in the pool of new sponsors as both Tours face significant sponsor negotiations in 2010.  The LPGA Tour investment is cheaper and that has some weight right now.  Given the choice, large corporations would likely choose the PGA Tour over the LPGA Tour.  With how tight money is now, though, the LPGA Tour could become an attractive cheaper option – particularly with the growth of the LPGA Tour overseas.

There are serious implications for any decision that the PGA Tour makes, but it will have to confront the reality that nearly one-third of its sponsors are in some kind of financial trouble.  The Tour probably did not anticipate the kind of backlash that Northern Trust received, but will now have to deal with that too.  The government is now a spectator of the Tour’s and it may be a bigger pestilence than the guy that shouts “Get in the hole!” after every shot.  It will have to make significant sacrifices to silence the government and its critics.